ServisFirst Bancshares, Inc. (NYSE:SFBS) Q4 2022 Earnings Conference Call January 23, 2022 5:15 PM ET
Company Participants
David Mange – Director of Investor Relations
Tom Broughton – CEO
Bud Foshee – CFO
Henry Abbott – Chief Credit Officer
Rodney Rushing – Executive VP & COO
Conference Call Participants
Brad Milsaps – Piper Sandler
David Bishop – Hovde Group
Operator
Greetings and welcome to ServisFirst Bancshares Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, David Mange, Director of Investor Relations. Thank you, David. You may begin.
David Mange
Good afternoon, and welcome to our fourth quarter earnings call. We will have Tom Broughton, our CEO; Bud Foshee, our CFO; and Henry Abbott, our Chief Credit Officer, covering some highlights from the quarter, and then we’ll take your questions.
I’ll now cover our forward-looking statements disclosure. Some of the discussion in today’s earnings call may include forward-looking statements. Actual results may differ from any projections shared today due to factors described in our most recent 10-K and 10-Q filings. Forward-looking statements speak only as of the date they are made and ServisFirst assumes no duty to update them.
With that, I’ll turn the call over to Tom.
Tom Broughton
Thank you, David. Good afternoon, and welcome to our fourth quarter conference call. I do want to make a few comments on the year, I think, in order before we move on to the 2023 outlook. We certainly are pleased with the results of the year. It’s a second straight year that our earnings per share growth exceeded 20%.
Also, our return on equity exceeded 21% and our efficiency ratio was 29%. And I must say this trifecta of 20s was due to the hard work of the best bankers in the industry. They actually do a pretty good job of making an average bank CEO look better than average, so I appreciate what they do to make us successful and thank them for everything they’ve done for our company and for our shareholders.
However though, there is little time to celebrate success as our shareholders do want to know what we plan to do in 2023, so we’ll move on and talking about — little bit about the year and going forward. And talking about liquidity, our bankers have focused on building deposits since the middle of 2022. We have seen a steady increase in the deposit pipeline over the last four months. We’re certainly pleased with the process and we’re consistently seeing the deposit pipeline at 150% of the loan pipeline, this Bud will cover, we did grow liquidity in the fourth quarter and we’re very pleased with our progress there. Fortunately, we’ve built our bank with core deposits, which are primarily commercial, not any brokered CDs and Federal Home Loan Bank Advances, our clean balance sheet is a tremendous asset in the current environment.
On the loan side, we did see good loan growth in the fourth quarter, we always see robust loan demand in the fourth quarter, there are some year-end draws for company balance sheet purposes that we see, so that’s always strong. We did see some slowdown in our loan pipeline, it’s mostly due to our being more selective on rate terms and structure and focusing on our core customers. Banks are in a much better position than many years on the loan front. We are certainly in stronger position, it will take time to see the improvement in loan yields, but it will come in the next couple of years.
From a team standpoint, we brought in outstanding new bikers in the fourth quarter and we now have 154 producers. While we are focused on cost containment in 2023, the door is always open for outstanding bankers.
So I will turn it over to Bud Foshee now.
Bud Foshee
Thanks, Tom. Good afternoon. Liquidity, our liquid assets increased by $470 million from September 30 to December 31. We expect this positive trend to continue in 2023, as we anticipate low double-digit deposit growth versus high single-digit loan growth. Our net interest margin PPP fees and interest income were $103,000 in the fourth quarter of 2022, compared to $5.1 million in the fourth quarter of ‘21.
Year-to-date PPP fees and interest income were $7.7 million in 2022. Alright, no PPP fee income is anticipated for 2023. Deposits increased by $500 million in the fourth quarter. Our net interest margin by quarter, starting with the fourth quarter of ‘21, it was 2.71%, first quarter of ’22 of 2.89%, the second quarter 3.26%, third quarter 3.64%, and then the fourth quarter of ‘22 it was 3.52%. Our loan loss provision, our allowance for credit losses to total loans was 1.25% at December 31, ‘22 and that is unchanged from September 30 of 2022. Our net charge offs average loans were 0.06% for the fourth quarter of 2022.
Non-interest income, credit card income was $2.3 million in the fourth quarter, versus $2.2 million in the fourth quarter of 2021. Our net interest cap income was $162,000 for the fourth quarter and $7 million year-to-date. We anticipate the net income to be zero in 2023 as the cap matures in May of 2023. Our non-interest expenses, salaries and benefits as a result of our market expansions, total salaries increased by $572,000 in the fourth quarter and by $6 million year-over-year.
Fourth quarter 2022 extended expense was $3.2 million versus $4.3 million for the third quarter of 20 22. We had net new ads to staff of 13 employees during the fourth quarter and 71 for 2022 year-to-date. Capital, the Bank’s Tier 1 capital leverage ratio has improved by 192 basis points, since December 31, 2021. The ratio was 7.79% at 12/31/21, and improved to 9.71% to 12/31/22. Tax credits, we have taken steps to extend the benefit period of some of our proprietary tax credits.
I’ll turn the program over now to Henry.
Henry Abbott
Thank you, Bud. I’m pleased with the Bank’s performance in 2022 and more specifically in the fourth quarter. During the past year, our borrowers had to stand on their own in this post COVID environment without major government stimulus that had occurred in the prior years and our customers have responded well even in the face of rising inflation. Bank’s balance sheet is well positioned for any uncertainty in 2023 and beyond with a record low amount of OREO with less than $250,000 and NPAs total assets of roughly 12 basis points.
Grew loans and we continue to be selective with new clients and we want to grow our bank with clients, who can fund both the asset size and liability type of our balance sheet. I’m pleased to say the majority of our credit metrics were in line with the prior quarter and that is near historical lows, so we won’t go into a ton of detail, but I’ll be happy to cover specifics in the Q&A section of the call.
As of loan growth, the Bank increased our loan loss reserve for the quarter by $5.3 million, which amounts to an ALLL to total loans of $1.25 million. The past due loans at year-end were $110 million on loan portfolio of roughly $11.7 billion, so we’ve not started to see weakening in the portfolio.
[indiscernible] were roughly $1 million less than they were in third quarter. The OREO portfolio decreased $5 million over the quarter, so it’s now only $248,000. Charge-offs for the quarter were 6 basis points, when annualized net decrease from 11 basis points for the prior quarter. We are proactive as possible on handling problem loans, so we don’t carry a known issue into the following year.
Our overall credit metrics continue to be outstanding and continue to improve for the quarter. 2022 was a strong year for our Bank and we head into 2023 well positioned to maintain our status as one of the top performing banks in the country.
With that will hand back over to Tom.
Tom Broughton
Thank you, Henry. One point I want to make is when we talk about the discussion on higher interest rates, and deposit betas and margin compression is that while we may have some quarter-to-quarter issues. However, higher interest rates help not hurt banks and it seems like today banks are more attractive as an investment alternative than they have been in a decade. It’s certainly interesting to me that some investors they were selling bank stocks when rates were low. And now they’re selling bank stocks when rates are high. So it was kind of hard to make some of them happy, it seems.
My first partner in the banking business years ago after several years in business, he observed that we always do better when we need deposits. And we do, we do better when we need deposits. It is certainly you have more discipline on the loan side, you can be more selective and also it helps you focus on what you need to do. So certainly, needing deposits is a good thing, higher rates is a good thing for banks.
We’re working on our 2023 budgets and finalizing those in the next couple of weeks as we plan the year, but we have certainly made significant investments in new bankers in 2022 that we think will see the benefit of this year. As you could see, we’ve had a last couple of years certainly been robust from a hiring standpoint. So we are very optimistic about the outlook for our footprint and particularly what our bank we think can produce as we go forward and we can continue to see robust economic activity in the Southeast.
With that, we’ll be happy to take any questions you might have.
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Brad Milsaps with Piper Sandler. Please proceed with your question.
Brad Milsaps
Hey, good afternoon.
Bud Foshee
Good afternoon, Brad.
Tom Broughton
Hi, Brad.
Brad Milsaps
Tom or Bud, I was curious, you know, you did grow deposits by about $0.5 billion as you mentioned. I’m just curious what type of cost didn’t those deposits have on average as you brought in, you know, I was looking at some of the supplemental data and noticed the spot rate on interest bearing deposits much higher than, kind of, where you were on average for the quarter? So just kind of wanted to get a sense of, kind of, the pricing on some of that deposit pipeline that you guys talked about?
Tom Broughton
Yes. So at quarter end, the cost — of our total deposits was 1.66%. Cost of interest bearing DDAs was 2.39% and total cost of interest-bearing deposits was 2.32%.
Bud Foshee
Yes. You know, Brad, it’s just — theirs is not a — there’s probably not a lot of uniformity there. That’s not — we’re not in the buy and deposits business and we’re in the business of development and relationships with customers. And most of the time when we go on a call, most of the time I’d say that the price and deposits never comes up, that’s not the sort of business we’re in. We’re not the buy and money standpoint business. So it’s kind of hard to give you a good answer, Brad, any better than that.
Brad Milsaps
Got it. Got it. Maybe ask differently, Bud in the past you’ve been kind enough to give us sort of the most recent month net interest margin, I might be curious if you do want to provide, sort of, most recent months net interest income. It would just seem that you’ve got quite a bit of a headwind as we kind of enter the first quarter given not only day count, but kind of where some of those deposit spot rates are? Just, kind of, want to get a sense of, kind of, your momentum as you enter the first quarter as it relates to NII?
Bud Foshee
Yes. But I don’t — in front of me, I don’t have just the month of December, I think you really looked at what we’ve got a quarterly analysis of our margin right? Like we were at 3.52% and margin for the quarter, I think 3.50% 3.60% is a good gauge for that. What is that, I mean, you know, the — there’s like how much the Fed is slowing down, it’s the right increases. I mean, there’s still a gifting game as where we’re going to be from a deposit cost standpoint. Like Tom said, I mean, that’s not the major thing we do when we count deposits, or we don’t manage large [data] (ph) with this we continue to grow the bottom line and don’t really look at just the margin this quarter.
Brad Milsaps
Okay. And then maybe just final question for me, I guess in total your expenses were up high teens in 2022? I know there’s a lot of incentive comp in there for the year that you had? Can you talk a little bit about, kind of, where you would like to see that number maybe managed to in 2023, kind of maybe some different puts and takes you might have maybe given the more challenging net interest income line?
Tom Broughton
We don’t anticipate that much really from a net staff additions in 2023, so that salary increases should be in the 3% to 4% range as if you guys come up. We do anticipate with the conversion that will save money from an IT standpoint, but I don’t think anything else. We had some unusual. We had like in the third quarter, we had our lawsuits so much or some other expenses like that, that will reoccur in 2023. So alright, Henry?
Brad Milsaps
But it also looks like this quarter you might have benefited from a — or no, maybe that’s year-over-year — no, kind of a reversal of the provision for unfunded commitments. Was that — am I reading that correctly?
Tom Broughton
We did. Yes, that one, you just — you never really know what that number is going each quarter. We did have a reversal in the fourth quarter.
Brad Milsaps
Okay. Did your unfunded’s come down?
Bud Foshee
Our funded beat the three-year average, which then caused it to decrease the need for the accrual.
Brad Milsaps
Okay. All right. Thank you, guys. I’ll hop back in queue.
om Broughton
Thanks, Brad.
Operator
Thank you. Our next question is from David Bishop with the Hovde Group. Please proceed with your question.
David Bishop
Yes. Good evening, gentlemen.
Tom Broughton
Hey, Dave.
David Bishop
Hey, Bud, I think you said in the pre-envelope, I’m not sure I heard you right, but it felt pretty good about just maybe the outlook for at least the direction of loan yields over the next year or so? Did I hear you right? It looks like the loan rate was 5.41% at the end of the quarter, but just curious maybe as you look out in the quarter or two and assuming the Fed stops maybe in this quarter or next? I’m just curious what’s the impact on loan yields in terms of the lagging catch up in terms of what you’re booking right now at market?
Bud Foshee
You’re talking about new loans or just what will reprice from the Fed mix change?
David Bishop
Yes, new loans and how that may rolled into the overall average loan yield over the next few quarters?
Bud Foshee
Yes. Well, our new loan should go on at least at prime at 7.5% from that standpoint. And when Fed raises rates over one month period, we have about $4.2 billion that reprices — that we were repricing. You take — you have about $2.1 million of either reprices and take $1 billion that reprices during the next 30-day period.
David Bishop
Over the next 30-days, I think —
Bud Foshee
[Multiples Speakers] just based on the new loan volume, I don’t have that projection.
David Bishop
Got it. And then just curious, and I think I heard you right, you’re expecting maybe low double-digit deposit growth. As part of that maybe just drilling down this quarter, what were some of the trends in the correspondent banking division of those balances and maybe a number of new relationships you’re able to add this quarter?
Rodney Rushing
Yes. This is Rodney Rushing. We grew the corresponding relationships throughout the year in the fourth quarter. I think our total number of new banks we added was seven for the quarter. Our total number of existing correspondent relationships is right at 340 probably all one or two that close.
And for the fourth quarter total fundings for correspondent grew by, I think, $140 million for the quarter. And for the year, correspondent balances were down mostly in the DDA balances, because banks didn’t have to keep near as much in their analysis account. Rates going up as fast as they did in ’22. We moved some of that into Fed funds and then some moved out. And as my correspondent banks their liquidity has been put to work and has declined just like I was getting 22%. The corresponding business continues to grow our relationships and we’re looking at a couple of new markets in 2023 that we haven’t finalized, which one we’re going to go to yet. But still growing it and we anticipate it continuing to grow.
David Bishop
Do you have the dollar balance at year end?
Rodney Rushing
Two point — just shy of $2.5 million, I think it’s $2.468 million.
David Bishop
Got it. And then on the credit front, just curious within the outlook for high single-digit loan growth. Any areas where you’re being more conservative, more cautious pulling the reins back from an underwriting and credit perspective?
Bud Foshee
I think kind of across the board and more specifically in commercial real estate sticking with core customers, who can have deposits and have loans with us and seeing our businesses where we’re focused this year.
Tom Broughton
Yes. Dave, this is Tom. Just to jump in is — we can be more selective today than ever. So it’s really an outstanding time. I mean, that’s why my old partner said things are better when we need deposits, because you make better decisions and we certainly can be very selective on the loan side and we can be much more proactive in pricing, rate structure today than we try not to ever give own structure, but we could certainly be more proactive than we’ve ever been in a long time. How about that?
David Bishop
Got it. Appreciate the color.
Operator
[Operator Instructions] Thank you.
Tom Broughton
Well, if there are no more question — sorry.
Operator
There are no further questions at this time. I’d just like to turn the floor to Tom Broughton for any closing comments.
Tom Broughton
Thank you, [indiscernible], sorry for interrupting. Brad on earlier, we’re working on 2023 budgets and we give you a little bit better idea on expense management after we finish them. But we just started — we got our first run about 30 a week ago. So that’s the first time we saw anything to our beginning point and we’re not even close to the finish line yet. So we are much — very proactive in expense management for the year as we go forward. So that’s certainly something we’re going to work on.
And I think we always say we’re disciplined growth company that sets high standards for performance and this is a great year for us to outperform the industry. And show that we are what we say we are. And I think probably a lot of banks are going probably set very low goals based on what I see you analysts throwing out there. So it is a great year to do it, and we appreciate everybody joining us on the call. Hope everybody has a good evening. Thank you.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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